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Trends Transforming Planning Pricing

As large, subscription-based advisory brands find significant growth with the average consumer, what could it mean for small RIAs and the way they price their services?

On this episode of Elementality, Reese and Matt look at why fee-based firms are finding significant success with a consumer-centric approach. By using a no-commission, unbiased advice model, firms are finding a fertile market of consumers who have never worked with an advisor. It’s a comprehensive approach, integrating planning into everything that money impacts—and all for an affordable subscription price. As a wider market of consumers seek guidance for the financial changes in their lives, Reese and Matt look at this trend, and how it may affect future pricing models.

 


Podcast Transcript

Reese Harper:
You can expose jobs to the consumer in a real clear way that allow them to go, “Oh yeah, I’d like that job. And I’d like that job. And yeah, do that for me too. And yes, that one.” But if you’re really bad at describing, I’m like, “I do comprehensive financial planning,” well, no one’s gonna pay you a lot for that.

Jordan Haynes:
Welcome to Elementality. I’m Jordan Haynes, Financial Planning Specialist at Elements. Each episode, Reese and Matt will discuss major challenges faced by financial advisors, and the things they can do to navigate the complexities of delivering quality financial advice to clients. We hope you enjoy this episode.

Reese Harper:
Welcome to another episode of Elementality, everybody. I’m your host, Reese Harper, here with my East Coast colleague, Matt Glazer. Matt, welcome to the fresh powder of Salt Lake City in the middle of winter.

Matt Glazer:
Thanks. It’s gonna be weird if this airs in the summer, but [laughter] it works for now.

Reese Harper:
Yeah. It’s February here folks, just in case you’re wondering, but this is probably getting aired in a little while. Matt and I like to stay ahead. Planners. Matt, you had an interesting topic you wanted to cover this week that I was interested in as well. Actually been the subject of some conversations in the industry and some of the PR news outlets. The general conversation I’d like to have is around the changing fee structure that seems to be gaining momentum due to a pretty big, I’ll say, capital injection into Facet Wealth that is a fixed fee versus AUM-based shop. And they’re not the only firm that’s getting traction in this way, but how about you tell the story, a little bit of this for listeners that don’t know, and then we’ll frame up the conversation in kind of what you kind of see as a useful conversation for advisors.

Matt Glazer:
Yeah, so the thing that got me thinking here was the recent… I think it was the Series C raise for Facet Wealth. They raised like $100 million bucks. And Facet’s been around for some time, but what you’re seeing now is more of these brands for financial advice start popping up. So yeah, Facet, there’s a company called Harness Wealth, which focuses on people who have equity compensation, broadly speaking. There is another new one that I saw pop up recently called Pattern Financial. They’re all like, historically, it’s been about individual relationships with people, and the brand has typically been the advisor. Like Reese, you probably started as your own brand, as Reese Harper, and you carry a lot of that forward, but now you’re seeing all these brands pop up to deliver financial advice, and doing so, like you mentioned, in a very different business model, on a subscription basis, paying for planning only.

Matt Glazer:
And yeah, there’s investment management, but it’s more or less like at cost. And so, it got me thinking, is the competitive landscape for us as advisors, is it changing faster? Are threats coming up at a faster rate than we previously realized? Are new opportunities becoming more accessible that previously weren’t accessible? Maybe the landscape’s not changing at all, maybe this is just noise, but that’s a pretty substantial raise for a fixed fee subscription planning offering that is a platform for CFP advisors, not like Reese Harper, you know? So I don’t know, I think it seems like a pretty invoked topic right now [0:03:56.9] ____ to discuss.

Reese Harper:
Oh, it totally is. Well, as a preface, I would say I don’t… Matt and I don’t… The details of that transaction aren’t super public, so I don’t know if this is a… Sometimes when details aren’t explicit that leave some unanswered questions, which I don’t wanna… I have no idea. I don’t know anyone at Facet and don’t have any relationship there. But like, was this a Series C, and what were the terms of that raise? Like, is there profitability? Are they waiting to double their book before we’ll see profitability? I just know there’s a lot of skeptics in the AUM world right now, going like, “I tried that once and I died,” right? And I know it’s possible, like it’s possible if you think about the differences between these two models. One is, I’m going to charge a lot to the people that have a lot, and I’ll have 80% margins on one side of my book and I’ll lose money on the other side of the book, and I’ll have a 40% operating margin ’cause I’m losing money and then making money on my other side of my book.

Reese Harper:
Well, good accounting, good operators, good finance, people would say, that’s generally not how you wanna run a business. You wanna have, what they call, good steady state margins across your customer base. So if someone… If it costs $2000 to serve a customer, you want that margin to be… You want that to be a $2800 revenue customer, so that you can have a 40% operating margin. And then if somebody’s cost to serve is $6000, you wanna have $10,000 in revenue, so you could have a 40% margin on that customer. So you’re matching your cost to serve with the complexity of the customer, and always… You know, maybe not having the exact same margin, like you’ll lose a little on the small ones to capture them a little earlier, but you’re not trying to like… You’re not expecting to lose money on a large portion.

Reese Harper:
And a good classic example, that’d be like, Merrill Lynch throwing nine brokers out to the market, knowing that 9 out of the 10 are just gonna die, and that none of them will make any money, and that there’s gonna be just a significant loss on the first chunk of their overhead of these $30,000 or $40,000 salaries they’re gonna put out there. And they’ve stopped doing that now, but it was a model that went on for a long time. So my gut’s telling me there’s something there. I’m smelling smoke in the air. There’s something happening here that’s different than the old way, ’cause that’s a big raise. And even if it was a preferred raise with a 2X liquidation preference, it’s still someone believed in the model and they see at some point we’re gonna turn this thing into margin, and that’s my feeling.

Matt Glazer:
I think the biggest signal here, and maybe this is what we can riff on is, not whether or not that’s like a viable business model, but the types of client… At least, again, according to press releases and such, at least the type of client they’re attracting, I think 70… I think it says 75% of their clients have never worked with an advisor before, and I don’t think it’s reading too in between in the lines or just connecting two dots that shouldn’t be connected to say that they’re working with a lot of people who’ve never worked with an advisor before and they’re charging flat fees or subscription fees for planning. There’s definitely a correlation there.

Reese Harper:
Yep.

Matt Glazer:
You could argue, yeah, maybe they’re more successful at marketing and attracting those people through marketing, sure, that’s just as viable an argument, but there’s gotta be something through this business model of reaching consumers in this day and age in time, reaching a new generation of consumers with a different business model that opens up a whole other part of the market that hasn’t been addressed before.

Reese Harper:
Well, then I can speak to this like… I can speak to this in my own experience because like at Dentist Advisors, if you look at where our new customers come… We have a model that’s a hybrid of a minimum fixed fee combined with an AUM fee that wipes out the fixed fee as AUM grows. We have some fixed fee relationships on the higher end of the market where we’ve been able to price it effectively and say, “Okay, this is what the fixed fee is going to be for this customer,” but for the most part, we found that it was… We didn’t get a lot of friction from AUM fees as long as the planning fee was low enough to allow someone to engage. The questions that we still have are like, how many people are not coming to us because we have AUM fees? We still don’t know. Or how many of prospects are just saying, “Dentist Advisors has AUM fees. I’m not showing up.”

Reese Harper:
I don’t know how many don’t even come to our door, I just know we’re still growing fast and doing… Charging both, but what I can tell you definitively is that the… I mean, at one point, a year and a half ago, almost half of our revenue was coming from fixed fees, and that… I mean, that’s just telling me like, “Almost all of your new clients are coming in the… ” I mean, I can see it too in the demographics, almost all of our new clients that are coming in, but they’re only paying fixed fees ’cause they don’t have any AUM yet. The bulk, the vast majority of hundreds of clients that we’ll add this year don’t have… Their fixed fee far exceeds the revenue that we’re gonna get from their AUM, far exceeds it. We’re definitely getting… A lot of our advisors are like, “Man, we’re still delivering a lot for this new customer that’s only paying us $3000 in this fixed rate.”

Reese Harper:
But that’s the promise of AUM as well, next year, you’re not gonna have to raise the $3000 or $3500 with that client to $4000 or $5000, you’re just gonna start seeing some AUM come in, “Hold on advisor, your book will get built. The AUM will build it, you won’t have to go back to your client and keep raising their fees all the time.” Where Facet’s going is they’re kind of building these fixed fee tiers and kind of saying, “For this level of complexity this, this level of complexity that.” And I don’t like it… I think that may be the right model, but it is complicated to keep moving people in between all these buckets, and there is some friction that I’ve experienced that they’ve probably figured out better than we have, but it’s difficult.

Reese Harper:
My point in bringing this Dentist Advisors example up was just to say that I think Facet is a good example of that. I’ve experienced it. There’s a bunch of people that would never have worked with us if we were just charging AUM. They just don’t have enough AUM, they wouldn’t wanna just pay AUM, ’cause they’re… They wouldn’t feel like there was anything gonna be delivered, it’s like, “What are you gonna deliver to me? I’ve only got $50,000 grand, I got $100,000 grand, I’ve got $150,000, like, you’re gonna do comprehensive planning for me? It doesn’t make sense that you’d have enough revenue to do that.” And so, it’s just been very clear that that has opened up a whole new market for us that we wouldn’t have had.

Matt Glazer:
I think it’s also… I mean, to some degree, you could argue that consumers are… There’s more accessibility to education around the business model, I guess, and the consumers’ awareness of how advice is paid for, how products are paid for in financial services.

Reese Harper:
Totally, yeah.

Matt Glazer:
I think it’s more transparent these days, and I still think that on the whole, I think we’d all agree that even still our consumers are woefully under-educated on how they actually pay for advice and what they actually get for the fees that they pay. I think there’s still a lot of work to be done there, and that’s in research. That said, I think you’re facing a more educated consumer these days and their ability to rationalize this. And at least, this conversation will be more of a thing between you and a prospect is, I think it’s definitely more relevant today, whether or not Facet Wealth succeeds in what they’re doing, or whether or not Harness Wealth or any of these other ones succeed in what their doing. I just think this is a sign of a broader trend of a changing consumer that will have to… I mean, that is accessible, if you put the right sort of a business model out there to capture them.

Reese Harper:
And if you can get your cost to serve down, which is what everyone is… If you’re a finance and again, finance kind of operator type person, you’re gonna go, “Okay.” Like, we’ve talked a lot on this podcast about jobs to be done, but if there’s… If in this new world where people… There is a way to charge fixed fees. If you can identify the most valuable jobs that the consumer wants to get done and just get rid of everything else, so say like, No, I’m not gonna do that job ’cause they don’t value it. No, I’m not gonna do that job, they don’t value it, and you just strip out all of the things that the consumer does not value down to the brass tax, which is like… Let’s just say that the consumer ultimately, the only thing they want is like, you manage the money when I send it to you, and if I have a question, I wanna call you, but I don’t want anything else. That’s it. And there’s a big chunk of the market that’s just saying that, well, yeah, you could probably do that for like, three grand, you can probably do that for like, four grand.

Reese Harper:
Somebody’s gonna be crazy enough to do it for $1800 bucks. You know, if technology improves then… And the consumer really only has one or two jobs they value, we’ll find out. My thesis right now is that there’s also an opposite opportunity for advisors, where an advisor that’s like, I don’t wanna work for low amounts of money. Well, then the other side is also true, which is, you can expose jobs to the consumer in a real clear way that allow them to go, “Oh yeah, I’d like that job. And I’d like that job. And yeah, do that for me too. And yes, that one.” But if you’re really bad at describing, I’m like, “I do comprehensive financial planning,” well, no one’s gonna pay you a lot for that. But if you say, here’s Job A I do and Job B, I do, and job C I do and you package it nicely and you really show them that, oh, did you know that this was possible?

Reese Harper:
“I can actually file your taxes for you, I can talk to your estate planner, I can coordinate all the account titling. I can make sure that you have money to donate to charity in a very efficient way. I can do… ” Like, you’re gonna start listing all the jobs. If you expose them to people, there is a big segment that’s gonna go, yeah, I don’t know, whatever the AUM fee is, like, 1% seems about right. I like all that, I want all of that, and I just wanna pay for it this way ’cause it’s easiest. And I don’t wanna pay like $20,000, but if that’s what it is, and it’s 1% of my account and one day I have 2 million with you and you’re gonna do all that and you’re gonna start doing it sooner, [chuckle] yeah, I’ll sign up for that. ‘Cause I still think you’re gonna find entrepreneurs on both sides going, “I’m gonna go after this cost-focused consumer that wants to minimize the jobs they wanna have done and cut the cost.”

Reese Harper:
And you’re gonna have others that are like, “Dude, I’m gonna find the people that don’t wanna lift a freaking finger and I’m gonna expose the jobs to them, and I’m gonna charge two points on AUM,” and that’s gonna be… Who’s gonna be able to sell value is gonna be just a different type of business. They’ll both be successful. One is gonna have to scale high, like you gotta scale… Like, Facet’s gotta scale quite a bit, and they’ve done a great job of doing that, but it takes a lot of capital as you can tell. And then another side, you could have a nice lifestyle practice where if you’re just over… If you’re adequately servicing or over-servicing even in highly valued jobs, you can charge as much as you want. So it’s just knowing the jobs, focusing on them, and I think your point of bringing this example up just illustrates how there’s gonna be more options in the future of the type of service you can pick from to get from an advisor, and advisors who are skilled and deciding what they’re gonna go after and how to do it efficiently, they’re gonna succeed.

Matt Glazer:
Yeah, I think it’s a really like, put this trend next to the trend and niching down and you can… I don’t know. I mean, if you get really, really specific in who you’re serving and really, really specific in the jobs you’re doing, you can pretty well control costs and predict costs to the point of managing your profitability and your margins to a really, really tight degree. Like, really knowing the impact of taking on one type of client versus another doing one type of job versus another.

Reese Harper:
Yeah.

Matt Glazer:
The more specific you can get in these jobs, I think the better, obviously from a margin management perspective.

Reese Harper:
Yeah, this has been… It’s a fun conversation, it’s a fun time to see the industry. It makes me get excited about all the possible niches I could go monetize in a really effective way, whether it’s like, just having a huge impact and charging very little or doing… There’s just tons of business models. I mean, there’s like… I see a future for one to many coaching services, I see employer-based kind of 401k, kind of Financial Health Services, I see family office services coming down market. I see family office services going up market where it’s like, sorry, it’s 200 grand a year now to be a part of our family office, and I know you only have $10 million, but that’s just the cost of being a part of our family office and people going, “Oh man, I just wanna be part of that big club ’cause they have access to private capital and they’re an LP for a seed fund, and they’ve got all these auths and they’re… On their board is the Director of Coinbase.”

Reese Harper:
And you can kind of see all the… It’s just gonna be a really diverse market, and that’s exciting, ’cause you can build whatever you want. Coming back to the jobs, you just gotta get real clear on what you’re doing and for who. I think it’s a beautiful place to work.

Matt Glazer:
Yeah. That was great thoughts. Thanks for sharing.

Reese Harper:
Thanks, Matt, I look forward to catching everybody next week. I’ll talk to you soon.

Matt Glazer:
See you guys.

Jordan Haynes:
Next time on Elementality.

Brett Danko:
You know, at one time it was 9:30 to 4 o’clock, like you were in the office no matter what, the eastern time. And so, it was a different world. And so what would happen is people are just walking around, you would just hear things or hear different situations, and I think that’s the way we best learn. So one of the things that we try and do in our education is take ideas, and for me and for my other instructors, it’s how do we actually create a client example? Because reading it on the page or reading it on Google, you can just search it and you could read about, oh, this is the verbiage about it, or this is the rule, but how do you take that and create a scenario?

Abby Morton:
You can learn more about the Elements Financial Planning System at getelements.com/meet and schedule a time to speak with one of our friendly financial planning experts. Elementality’s executive creators are Reese Harper and Matt Glazer. Elementality is produced by Abby Morton and directed by Jordan Haynes. Have a good one.

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